ABA Corporate Member, Alexander & Partner, is pleased to present an update on recent financial regulatory initiatives in the GCC. This update covers the period from April to June 2019 and contains information on initiatives in Bahrain, Saudi Arabia and the UAE. This Regulatory Update will be a regular feature on our website, with new updates being published approximately every...
Saudi Arabia Projects $35 bn Budget Deficit for 2019
The Saudi Budget attracted little attention when it was announced over the holiday period at the end of 2018. It contained little that was new, in terms of policy initiatives, and revenue and expenditure expectations are broadly in line with what has been has been projected in recent years. The 2019 budget is characterised by consistency rather than innovation – although the success of new taxes, such as VAT, is noteworthy.
The Kingdom is projecting a budget deficit of $35bn for 2019, almost the same as the $36bn estimated outcome for 2018.
Expenditure in 2019 is due to rise by 13% when measured against the amount budgeted for 2018, and by 7% when compared to the estimated actual expenditure in 2018. Revenues in 2019 are due to increase by 24% when compared to the amount budgeted for 2018, but by only 9% when compred to the estimated actual outcome for 2018.
The increase in expenditure is due largely to outlays on mega-projects related to Vision 2030, the Saudi government’s long-term economic and social restructuring plan. Projects related to drinking water, sewerage and infrastructure for new industrial cities get particular mention in the Budget Statement.
The Kingdom is maintaining its medium term objective to reduce the deficit to zero in 2023 and this year's projections from the Ministry of Finance showing the 'glide path' to get there are broadly consistent with what the Ministry said a year ago. The biggest difference lies in the smaller deficit now foreseen for 2019, compared to that which was previously estimated.
But projecting Saudi government revenues and expenditure is notoriously difficult. However much the Kingdom is able to fulfil its objective to increase revenues unrelated to oil and gas (and it is having success in this area, see below) revenue projections will continue to depend on assumptions about the level of oil prices several years in the future, and no-one is able to predict that with any degree of certainty.
Tax revenues doubled to $44bn in 2018, a remarkable achievement, but they still accounted for only 18.5% of total revenues. The increase was mainly due to higher revenues from VAT, the levy on expatriate workers, and excise duties on goods such as sugary drinks and tobacco.
VAT was introduced in January 2018 at a rate of 5%. Firms with taxable or expected sales greater than SR1mn ($267,000) had to register for VAT by 20 December 2017 and those with sales greater than SR375mn by 20 December 2018. VAT revenues during 2018 were $12.2bn, double the amount budgeted, but they are expected to show only a marginal increase in 2019.
The expatriate levy is expected to raise income of $15bn in 2019, double that raised in 2018. Revenue from taxes on specific commodities such as soft drinks, energy drinks, and tobacco products is budgeted at $2.7bn in 2019, a little less than in 2018 as a result of timing issues related to the inauguration of the taxes in 2017.
In addition to the infrastructure spending mentioned above, higher budgeted expenditure in 2019 is also attributable to the restoration of annual allowance payments to state employees, civil servants and military of SR 1,000 ($267) per employee per month, and to retirees and social service recipients, who receive SR 500. Student stipends were raised by 10% and the number of scholarships increased.
(The Budget Statement notes that more than 196,222 students, with their dependents, are studying abroad, and that the number of students on internal scholarships exceeds 19,435. Annual expenditure on these programmes is $ 3.9bn, excluding scholarships for employees of government entities.)
Debt financing will increase in the years ahead, though it will remain modest in relation to GDP. The projections are as follows:
2018 government debt of $149.3, which is equivalent to 19.1% of GDP
2019 government debt of $180.8, which is equivalent to 21.7% of GDP
2020 government debt of $201.1, which is equivalent to 23.1% of GDP
2021 government debt of $226.1, which is equivalent to 24.8% of GDP
Other figures given in the Budget Statement include:
- Nominal GDP: up 14.1% in 2018, driven by higher oil prices but also 4.9% increase in nominal non-oil GDP.
- Real GDP: growth expected to be 2.3% for 2018
- Bank credit to the private sector: up 1.7% y-o-y to October 2018
- CPI: expected to be up 2.6% 2018, compared to negative 0.9% previous year.
- Current account: surplus estimated at $80bn.
- FDI: expected to reach $3.2bn in 2018.
- SAMA reserves: estimated to have fallen by 10% during 2018, ending the year at $139bn.
Attached below are two tables, showing budget versus actual revenues and expenditures since 2012, and a comparison between the deficit elimination plan announced last year, and the updated version this year.
The Ministry of Finance's Budget Statement gives figures in Saudi Riyals. Throughout this article, they have been converted into dollars at a rate of $1=SR3.75. The original text of the budget statement is here.
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